Could the iron ore price fall to just US$35?

The iron ore price peaked above US$70 a tonne on Thursday (for the first time since January 2015) last week after rising 16% in just four days. Unfortunately, it seems that rally may have been short-lived with many of those gains being reversed so far this week.

According to data from The Metal Bulletin, the metal has lost almost 11% since that time, including a 5% fall overnight. It’s fetching just US$62.78 a tonne now, with many analysts (with the exception of Credit Suisse) suggesting this could be the start of another sharp downtrend.

While The Australian Financial Review has quoted analysts from Credit Suisse as saying they think the metal still has further upside potential, others, including Goldman Sachs, think it is all downhill from here. In fact, they think it will drop as low as US$35 sometime during the fourth quarter of 2016, suggesting a 44% decline from its current level.

Others are a little less bearish, but still think it could drop to around US$50 before the end of the year.

The truth is, many of the factors that have driven the recent rebound appear to be temporary in nature. The world’s biggest producers are still providing plenty of supply for the global market which is also experiencing a decline in demand growth.

Although China remains the biggest consumer of the metal, it seems likely that consumption and demand for services will be the more predominant driver of growth in the long-term. This could exacerbate the supply and demand imbalance, forcing the iron ore price lower, over time.

Shares across the sector have actually risen today, despite the overnight fall, but are down significantly over the last week or so, with investors perhaps recognising the iron ore price may have run its race. BHP Billiton Limited (ASX: BHP) shares are trading 5.9% below their Thursday high, while Fortescue Metals Group Limited (ASX: FMG) shares have declined 11% in the same time.

However, with plenty of downside risk and what seems to be limited upside potential (at least in the near-term), investors would be wise to approach the sector with caution and perhaps focus their attention on other corners of the market instead.

For example, The Motley Fool's renowned dividend investing guru recently revealed his newest dividend buy recommendation and short list of 3 Best Dividend Buys Now. Which means if you're reading this message right now, you're not on the list to uncover their names before they potentially go gangbusters. Simply click here to learn more about these shares.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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